The Internal Revenue Service imposes separate tax return filing requirements on different types of business organizations. However, the tax filing rules that apply to a limited liability company, or LLC, depend on how the members choose to treat the business for federal income tax purposes. Some organizations must file a tax return during tax years when there is no business activity, while others must meet minimum taxable income requirements.
If you designate the LLC as a corporation for tax purposes, you must file a corporate tax return each year, regardless of whether the business is active or inactive. The IRS requires you to report the inactivity on Form 1120 and file it no later than the fifteenth day in the third month after the close of the LLC’s tax year. If you are unable to file the return by the original due date, prepare a Form 7004 for an automatic six-month extension of time to file. If the LLC does not have taxable income for the year, you will not incur late-filing penalties or interest during the extension period.
Limited liability companies that you designate as a partnership for tax purposes must provide the IRS with an informational tax return on Form 1065 and a Schedule K-1 attachment for each LLC member. This filing requirement remains effective for any tax year the LLC has no business activity or income. When you prepare the return, you can simply enter zeroes for revenue and expenses. Unless you file Form 7004 for an automatic six-month extension of time to file, the IRS will impose an $89 -- current as of November 2010 -- per-partner penalty for each month you file the return after its due date. Schedule K-1 reports each member’s share of partnership profits and losses. The IRS will impose an additional penalty of $50 per month for each K-1 you fail to attach to the return by the due date.
If the LLC is disregarded for tax purposes, report all of the LLC’s business activity on a personal tax return by calculating each net profit or loss on the Schedule C attachment to IRS Form 1040. However, you need not file a Schedule C if the net taxable earnings for the business are $400 or less. Therefore, no tax reporting requirements exist for inactive LLCs. If the LLC does generate taxable income less than $400, include the amount on the first page of Form 1040 even though you do not prepare a Schedule C.
Read More: What Is a Disregarded Entity LLC?
If you are the member of an inactive LLC, you may be able to make an election to change the tax rules that apply to the business that reduce tax filing burdens in years of inactivity. By filing IRS Form 8832, you can change a disregarded entity to a corporation, a corporation to a disregarded entity or partnership, and a partnership to a corporation. However, you can only change an election once every 60 months.